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Poland May Keep Rates at Record Low as Belka Outweighs Inflation

Oct. 26 (Bloomberg) -- Poland’s central bank will probably reject a motion to raise interest rates for a third straight month as Governor Marek Belka’s warnings that capital inflows may undermine economic growth outweigh concern about inflation.

The Monetary Policy Council will keep its benchmark seven-day reference rate at a record-low 3.5 percent after a two-day meeting that begins today, according to 11 of 18 economists surveyed by Bloomberg. With seven economists forecasting a rate increase, this is the first time analysts haven’t been unanimous since the panel stopped cutting rates in June 2009.

“This month, Belka’s vote will be decisive,” said Ernest Pytlarczyk, an economist at BRE Bank in Warsaw. “But with output growth stabilizing at high levels and inflationary pressure strengthening, the council can’t avoid beginning the tightening” cycle in coming months, he said.

Belka, chief of the International Monetary Fund’s European department until he was named governor in May, has cautioned that raising rates will increase inflows as the European Central Bank keeps borrowing costs low and investors chase higher returns. That may cause the zloty to appreciate, making Polish goods more expensive and damping the export-led recovery.

The zloty has strengthened 2.3 percent against the euro in the past three months, the third-biggest gain among 31 major currencies tracked by Bloomberg. The Polish currency fell 0.2 percent to 3.9371 per euro as of 9:56 a.m. in Warsaw.

“With this ocean of liquidity around us, we have to be worried about the interest-rate disparity between Polish rates and global rates, especially European rates,” Belka, 58, said in an Oct. 9 interview with the Wall Street Journal. “We have to factor in our monetary policy this difference which of course induces the inflow of capital.”

Inflation Accelerates

The ECB has kept its benchmark refinancing rate at 1 percent since May 2009. In the U.S., where the benchmark rate is almost zero, the Federal Reserve says it may make further asset purchases, known as quantitative easing, to boost growth.

Some members of Poland’s 10-person Monetary Policy Council sought a half percentage-point increase at rate-setting meetings in August and September, arguing that record-low rates were no longer appropriate as economic growth accelerates after the global financial crisis.

The central bank forecasts Poland’s economy may expand 4.6 percent next year, after slowing to a decade-low 1.8 percent in 2009. The annual inflation rate rose to 2.5 percent last month, exceeding analyst estimates and reaching the mid-point of the bank’s target range, the statistics office reported Oct. 13.

Estimates Revised

Some economists estimate inflation may accelerate to 3 percent by year-end and top 3.5 percent, the upper end of the bank’s target range, in 2011.

“We expect inflation to exceed the central bank’s target in October and to continue growing in coming months,” said Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw. “Assuming that the majority of the council shifts to a forward-looking strategy after seeing the inflation report, monetary tightening in October is quite likely.”

At least two members of the rate-setting panel have spoken publicly about the need to raise rates, with Andrzej Bratkowski calling for a “visible, at least 50-basis point raise.”

“The hawks are becoming increasingly vocal,” said David Oxley, an economist at London-based Capital Economics. “We still think they will remain in the minority, for now at least, not least because Governor Belka remains relatively dovish.”

Belka Tightens Grip

Belka, who holds the tie-breaking vote on the rate-setting panel, has called on policy makers to reduce their public comments so the central bank can speak with one voice and deliver clear signals to the financial markets.

In addition to Bratkowski, three council members have commented on economic data since the Oct. 13 inflation report.

Andrzej Kazmierczak confirmed his preference for keeping rates unchanged by telling the PAP newswire that “higher inflation doesn’t mean an automatic rate increase.” Anna Zielinska-Glebocka and Elzbieta Chojna-Duch, seen as swing votes, didn’t give an indication of how they may vote.

The central bank’s new inflation forecast will be crucial for the next rate decision, Chojna-Duch said Oct. 15 at a conference in Warsaw.

“The data show that consumer prices are still in a gradual rising trend,” Zielinska-Glebocka said Oct. 13. “There is still a large degree of uncertainty about the price outlook.”

Investors are betting the central bank is more likely to raise rates in November than this month. One-month forward-rate agreements are trading at 3.97 percent, or 13 basis points more than the three-month Warsaw Interbank Offered Rate of 3.84 percent. The price for two-month contract is 4.0750 percent, giving a premium of 26 basis points above Wibor.

“There is a majority of members who have been sitting on the fence,” said Pasquale Diana, an economists at Morgan Stanley in London. “The divergence of their opinions, the fairly relaxed rhetoric of some members and above all the prospect of quantitative easing elsewhere have increased the risks that rates may be left on hold for a while longer.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at

To contact the editor responsible for this story: Willy Morris at

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